Lecture 45

Project Procurement,
Contract Management,
and
Ethics
in
Project Management
1

Lecture 44 contents

What is Risk?
Primary Components
Tolerance of Risk
Risk Management
Cat of Risk
Risk Planning
Risk Assessment (identification and analysis)
Risk Handling
Risk Monitoring
Qualitative Risk Rating
2

Lecture 45
Procurement
Procurement Cycles
Requirement cycle
Requisition Cycle
Solicitation cycle
Award Cycle
Admin cycle

2. Type of contract
Six Categories of Contract

Ethics in Project Management

3

Self-pity is our worst

enemy &
if we yield to it,
we can never do anything
wise in this world
- Helen Keller

To be prepared
is half the
victory.
Miguel de Cervantes Saavedra

Treat people as if they were

what they ought to be,
& you
help them to become
what
they are
capable of being
- Johann Wolfgang von Goethe
6

The quality of a person's

life is in direct production
to their commitment to
excellence,
regardless of their chosen
field of endeavor.
7

The race is not always

to the swift...
but to those
who keep
on running.
8

In three words,
I can sum up
everything I've
learned about
life: It goes on.
- Robert Frost
9

Action in Your Project

Action may not

always bring
happiness,
but there is
no happiness
without Action
- Benjamin Disraeli

10

Procurement

Acquisition of goods/services.
Procurement (& contracting)
is a Process that involves
-Two Parties with:
Different objectives
Who Interact in
a given market segment.
11

Good Procurement Practices

includes
Corporate profitability by:
Taking advantage of:
1. Quantity discounts,
2. Minimize Cost/Financial
Problems,
3. Seeking out Quality Suppliers.
12

As Procurement
Contributes To Profitability
Procurement is Often
Centralized,
-Results in Standardized
practices
-Lower Paper work Cost
13

Objectives of Procurement
Planning are to select one of
following for the Procurement
of all Goods/Services:
1. From Single Source.
2. From Multiple/source.
3. Procure only small portion of
Goods/Services
4. Procure none of Goods/Services
14

Environment in which Procurement Take

Place is Critical factor.
There are two environments:
1. Macro &
2. Micro.

Macro environment includes General

external variables that can Influence
How & When we do Procurement and
it Includes:

Recessions,
Inflation,
Cost of borrowing money,
Unemployment.
15

Micro environment is the internal to Firm Include

Procurement /Contract System five cycles:

Requirement Cycle: Defines boundaries of

Project
Requisition Cycle: analysis of sources
Solicitation Cycle: Bidding process
Award cycle: Contractor selection & Contract
Award
Contract Admin Cycle: Managing
subcontractor until Completion of the
Contract.
16

Several Activities of
Procurement Process that
overlaps Several of Cycles.
These cycles are conducted
In parallel, especially
Requisition & Solicitation.
17

1. Requirement Cycle
First Step in Procurement
Process Definition of
Project Specifically
Requirements
18

1.
2.

3.
4.
5.
6.

Requirement Cycle Includes

Defining the need for the project
Development of the statement of work,
specifications, and work breakdown
structure
Performing a make or buy analysis
Laying out the major milestones and the
timing/schedule
Cost estimating, including life-cycle costing
Obtaining authorization and approval to
19
proceed

Specifications

Written Pictorial or graphic Information

describe define or specify
services/item to be procured:
1. Design (physical Characteristics)
2. Performance (measurable
capabilities)
3. Functional Specification ( subset of
Functional , risk is on contractor)
20

2. Requisition Cycle

Once the Requisition

identification,
Requisition form sent
to Procurement to begin
Requisition Process.
21

Requisition cycle Include:

1. Evaluation confirming specification.
2. Confirming sources
3. Reviewing past performance of
sources
4. Producing Solicitation Package (S/P)
Solicitation Package sent to each
possible Supplier for Playing Field
is level.
22

Specification Package Includes:

1. Bid documents (usually standardized)
2. Listing of qualified vendors (expected to
bid)
3. Proposal evaluation criteria
4. Bidder conferences
5. How change requests will be managed
6. Supplier payment plan
23

3. Solicitation Cycle
Selection of Acquisition Method is
the Critical Element in Solicitation
Cycle.
Three Acquisition Methods :
Advertising
Negotiation
Small Purchases (off supplies)
24

Advertising company goes

out for sealed bids.
There are no negotiations.
Competitive market forces
determine the price and the
award goes to the lowest
bidder.
25

Negotiation is when the price is

determined through a bargaining
process. In such a situation, the
customer may go out for a:
Request For Information (RFI)
Request For Quotation (RFQ)
Request For Proposal (RFP)

The request for Proposal (RFP) is the

most costly endeavor for the vendor.
26

Large proposals contains:

separate volumes for cost,
technical Performance,
Management History, Quality,
facilities, subcontractor
Management, & Others.
27

On Large contracts the Negotiation

Process may Also Includes Price,
Quantity, Quality & Timing.
Vendor Relations are critical during
contract negotiations.
Can Shorten Process due to:
1. Integrity of relationship &
2. Previous history
28

Award Cycle (A/C)

Result in a signed
contract. Several types of
Contracts.
So Negotiation process also
Include selection of the
Type of Contract.
29

Objectives of Award Cycle is to

negotiate a contract:
-Type & Price
-Result in reasonable Contractor
risk & Provide Contractor risk
with Greatest Incentive for
Efficient & Economic
Performance.
30

There are certain basic elements of most contracts.

Mutual Agreement: There must be an offer and
acceptance.
Consideration: There must be a down payment.
Contract Capability: The contract is binding only if
the contractor has the capability to perform the
work.
Legal Purpose: The contract must be for a legal
purpose.
Form Provided By Law: The contract must reflect
the contractor's legal obligation, or lack of obligation,
to deliver end products.
31

The Two Most Common Contract Forms are

completion contracts and term contracts.
Completion Contract: The contractor is
required to deliver a DEFINITIVE END
PRODUCT. Upon delivery and formal
acceptance by the customer, the contract is
considered complete, and final PAYMENT
CAN BE MADE.

32

2. Term contract:
The Contract Is Required To Deliver A Specific
"Level Of Effort," Not An End Product.
The effort is expressed in Woman/Man-days (Months
Or Years) over a Specific Period Of Time using
Specified Personnel Skill Levels And Facilities.
When The Contracted Effort Is Performed, the
contractor is under no further obligation. Final
payment is made, irrespective of what is actually
Accomplished Technically.
33

Final Contract also called

Definitive contract,
Follows normal Contracting
Procedures. E.g. Negotiation of
all Contractual Terms &
Condition on Cost & Schedule
prior to Initiation of
Performance.
34

Negotiating of contract and

preparing it for signatures may
require months of preparation.
If the customer needs the work to
begin immediately or if long-lead
procurement is necessary,
then:
35

Customer may provide the

contractor with a letter contract
or letter of intent (LOI). The letter
contract is a preliminary written
instrument authorizing the
contractor to begin immediately:
1. The Manufacture Of Supplies Or
2. The Performance Of Services.
36

Final contract price

Must be negotiated
after performance begins,
Definitive contract
must
still be negotiated.
37

Types of contract selection

based upon following:
1.
2.
3.
4.
5.
6.
7.
8.

Overall degree of Cost & Schedule Risk

Type & complexity of Requirement (technical Risk)
Extent of Price Competition
Cost/Price Analysis
Urgency of Requirements
Performance period
Contractor's Responsibility (and Risk)
Contractor's Accounting System (Report Earn Value
reporting?)
9. Concurrent Contract (contract take A back seat to existing
work?)
10. Extent of Subcontracting (how much work contractor out
source?)
38

General six types of contracts :

Fixed-price (FP),
Cost -plus-fixed-fee (CPFF),
Cost-plus-percentage-fee (CPPF),
Guaranteed Max-Shard Savings
(GMSS),
Fixed-price Incentive- Fee (FPIF),
Cost-Plus-Incentive-Fee (CPIF)
39

First Category
Fixed-price or
Lump-sum contract

40

Contractor carefully Estimate

Target Cost.
Contractor required to Perform
work at negotiated Contract
Value.

41

If Estimated target cost is

low then Total Profit
reduced & may vanish.
Contractor may not be able to
underbid competitors So
Contractor assumes a Large
risk.
42

Lump-sum
Provides Max Protection to
Owner for ultimate Cost of
Project.
Disadvantage:
Requiring a Long Period For
Preparation & Adjudications of
Bids.
43

Because of a Lack of
knowledge of
Local conditions,
all contractors Include
Excessive
Contingency.
44

Chang Requested
By owner after Award of
contract Lead to
Troublesome &
Sometimes Costly
extras
45

nd
2

Category
Cost-PlusFixed-Fee
(CPFF)
46

Cost Plus Fixed Fee (CPFF)

If Accurate Pricing Not Possible in Any Other
way.
So we use CPFF, so Cost may vary but Fee
remains same.
Contractor agrees only to use Best Efforts to
Performance
Good/Poor Performance
Rewarded equally.
47

Total Rs/$ Profit likely To

Produce Low Rate of Return
reflects Small Amount of
Risk By contractor.
Fixed Fee - small % Age Of
Tot/true Cost.
CPFF Required Company books
be audited.
48

3: Cost-PlusPercentage
fee Contract

49

Provides Maximum flexibility

to owner Permits Owner &
Contractor to work
together cooperatively on
All Technical, Commercial,
Financial Problems.
-No Financial Assurance of
Ultimate Cost.
50

No financial incentive to
contractor this because of High
building cost (Compared with
other forms).
Only meaningful Incentive can be:
1. Inc competition &
2. Prospects for
Follow-on contracts.
51

th
4

Category of
Contracts
Guaranteed
Maximum-Share
Savings
52

Contractor-Gets Fixed Fee for his

Profit and Reimbursed for the
Actual Cost of Engineering,
Materials, Construction Labor, all
Other Job Costs,
But only up to Ceiling figure
established as Guaranteed
maximum"
53

Savings below the" Guaranteed

Maximum are Shared between
Owner & Contractor, where
as Contractor Assumes the
Responsibility
For any Overrun beyond
Guaranteed Maximum Price.
54

Contract form Combines

advantages as well as
disadvantages of Both Lump
Sum & Cost-Plus
Contracts.
Best form for Negotiated
Contract as it Establishes a
Maximum Price At Earliest
Possible Date
55

Though contract awarded

without Competitive
Tenders.
-Yet Protects owner
Against being
Overcharged,
56

Unique in that Owner &

Contractor share Financial
Risk & Both have Real
incentive To Complete
Project At lowest Possible
Cost.
57

5th Category of Contract

Fixed-PriceIncentive-fee
Contracts
58

These are Same as FixedPrice contracts Except have

some Provision for
Adjustment of the Total
Profit by a formula.
This Formula Depends on
Final Total Cost at
Completion of Project
59

Formula Agreed to in
advance By Owner &
Contractor.
To use this Both Project
or Contract Requirements
Must be firmly established
60

Provides An incentive to
Contractor To:
a) Reduce Cost
b) Increase profit
Both Owner & Cost Share in
Risk & Savings.
61

th
6

Cat.
Cost-PlusIncentiveFee Contracts
62

Same as: Cost Plus Contracts, Except

have Provide for Adjustment of Fee
as Determined By a Formula:
Compares Total Project Cost to Target
Cost.
Formula agreed to in advance by Owner
& Contractor. Used for Long
Duration or R&D Type Project.
63

5. Contract Admin Cycle

Contract Administrator is
Responsible for Compliance
By the Contractor to Contract's
Terms & Conditions
To Make Sure Final Product is
Fit for Use.
64

Functions of contract administrator Include:

Change Management
Specification interpretation
Adherence to Quality
Warranties
Subcontractor Management
Production surveillance
Waivers
Contract breach
Resolution of disputes
Project Termination
Payment Schedule
Project Closeout
65

 Part Two
Ethics

66

Ethical Origins

Societal Ethics:

Standards of Members of
Society
use when dealing with
each other.
Based on
Values & standards
67

Societal Ethics:

Found in Societys
Legal Rules,
Norm, & Mores.
Codified in the
Form of Law
& Society Customer.
68

Norms dictate
how people
Should behave.
Societal ethics vary based
On a given Society.
Strong beliefs in one
country
differ elsewhere.

69

Professional Ethics:
Values & standards used by
Group of Managers in workplace.
Applied when Decision
not Clear-Cut Ethically.
Physicians/Lawyers
Professional Associates
(PMA, Bar Council)
70

Values

An individuals Basic
convictions of
What is Right &
Wrong
71

Values

Basic beliefs About what

one should or
should not do?
& What is &
is not important?
72

Individual Ethics:

Values of an individual
resulting from their
family & upbringing.
73

Behavior
not illegal,
Yet People still
disagree
If not
ethical.
74

Ethics of top
Project Manager
set the
tone for
Project
75

Ethics Codes
& Policies
Provide sign of top
Managements desires
in
Project Based
Organizational culture
76

Why Behave Ethically?

Project Manager should

behave ethically
To Avoid Harming others.
Managers Responsible for
Protecting & Nurturing
Resources
In their Charge.

77

Leadership, Culture,
Incentive
Compensation Plans help
Shape
Individual Ethical
behavior
in Project Management
78

Promoting Ethics

Evidence
Showing Ethical
Managers
benefit
over long term .
79

Ethical Control System in Project

Management
Formal System to encourage
Ethical Management.
Project Management Firms appoint an
Ethics Ombudsman to monitor
practices. Communication

standards
To all employees.
80

Ethical culture: firms

increasingly seek to
make good ethics
part of norm &
organizational
culture
.

81

Ethical decisions involve

Normative Judgment implies

something is good or bad,
right or wrong, better or
worse.
Morality Societys accepted
norms of behavior
82

Should you pay compensation pay

to laid off workers?
May December Stakeholder
Return.
Should you buy goods from
overseas firms that hire
children?
If you dont Children may not earn
enough money to eat.
83

Views of Ethical Decision-Making

Decisions are
Decision makers
Decisions made
concerned with
seek to impose
solely on the basis
respecting and pro- and enforce rules
of outcomes or
tecting basic rights
fairly and
consequences
of individuals
impartially

84

Code of Ethics
Professional organizations
Project Management Institute
(PMI)
Taking a serious look at
developing
Requirements for a Professional
Project manager.
85

Ethics obligation matrix.

86

CODE OF ETHICS FOR PROJECT

MANAGERS
PREAMBLE: Project Managers, in the
pursuit of their profession, affect the quality
of life for all people in our society.
Therefore, it is vital that Project Managers
conduct their work in an ethical manner to
earn and maintain the confidence of team
members, colleagues, employees, clients
and the public.
87

ARTICLE I: Project Managers shall maintain high standards

of personal and professional conduct.
a) Accept responsibility for their actions.
b) Undertake projects and accept responsibility only if
qualified by training or experience, or after full disclosure to
their employers or clients of pertinent qualifications.
c) Maintain their professional skills at the state -of-the-art and
recognize the importance of continued personal
development and education.
d) Advance the integrity and prestige of the profession by
practicing in a dignified manner.
e) Support this code and encourage colleagues and coworkers to act in accordance with this code.
f) Support the professional society by actively participating
and encouraging colleagues and coworkers to participate.
g) Obey the laws of the country in which work is being
performed.
88

ARTICLE II: Project Managers shall, in their

work:
a) Provide the necessary project leadership to promote
maximum productivity while striving to minimize costs.
b) Apply state-of-the-art management tools and techniques to
ensure schedules are met and the project is appropriately
planned and coordinated.
c) Treat fairly all project team members, colleagues and coworkers, regardless of race, religion, sex, age or national
origin.
d) Protect project team members from physical and mental
harm.
e) Provide suitable working conditions and opportunities for
project team members.
f) Seek, accept and offer honest criticism of work, and
properly credit the contribution of others.
g) Assist project team members, colleagues and co-workers in
89
their professional development.

ARTICLE III: Project Managers shall, in their relations

with employers and clients:
a)
b)
c)

d)
e)

Act as faithful agents or trustees for their employers or clients in

professional or business matters.
Keep information on the business affairs or technical processes
of an employer or client in confidence while employed, and later,
until such information is properly released.
Inform their employers, clients, professional societies or public
agencies of which they are members or to which they may make
any presentations, of any circumstances that could lead to a
conflict of interest.
Neither give nor accept, directly or indirectly, any gift, payment
or service of more than nominal value to or from those having
business relationships with their employers or clients.
Be honest and realistic in reporting project cost, schedule and
performance.
90

ARTICLE IV: Project Managers shall, in

fulfilling their responsibilities to the
community:
a) Protect the safety, health and welfare of the
public and speak out against abuses in
those areas affecting the public interest.
b) Seek to extend public knowledge and
appreciation of the project management
profession and its achievements.
91

 Part Two ends

92

Social Responsibility

Social Power
Social Responsibility Concept

Project Management Organization

must behave Proactively
Business has certain social
responsibility because power it
wields
Be a Good Corporate Citizen
93

Social Responsibility Pyramid

Good Corporate Citizen

Do What is Right, Just

Obey the Law

Make Enough Money To Survive

94

Levels of Social Responsibility

Reactive
(Obstruction)

Low

Defensive

Accommodative Proactive

Level of Social Responsibility

High
95

Social Responsiveness
Accommodative Response:
Managers realize need for social
responsibility.
Try to balance interests of all S/H.
Proactive response: Manager actively
embrace social responsibility.
Go out of their way to learn about & help
Stakeholders
Good Corporate Citizen

96

Why be Responsible?
Managers accrue benefits by being responsible.

Workers & Society benefit.

Quality of Life in Society improve.
It is the right thing to do.

Whistleblowers: a per reporting illegal

or unethical acts.
Now protected by law
Social audit: Managers specifically take ethics &
business into account when making decisions.
97

The Social Audit

Social Returns

Negative

Low
Medium
Profitability

High

Negative
Low
Medium
High

Favored
Strategies

98

Arguments For
Social Responsiveness

Business is
involved in
social issues
99

Business
resources to
tackle todays
complex societal
problems
100

A better society means

a better environment for
doing business
Corporate social action
will prevent
Government intervention
101

How Firms Can Improve Their Social

Responsiveness (Ethical Performance)
Establish and publish their own Code of Ethics
Ombudsmen - (committee, task force) to review the
corporate past behavior
Protect whistle-blowing - when an employee
discloses an illegal, immoral, or unethical action
committed by a member of the organization
Training programs - ethical sensitivity training
Controlling compliance - corporate social audit (or
ethics audit)
Leadership - demonstrate commitment from
leaders
Involve personnel at all levels
102

 Part Three
Recap of the course

103

Management
Project Management
Project Manager
Project Proposal
Project Feasibility
Project Selection Method
Project Planning
Scope
Charter
Quality ( 3-4 )
Productivity
104

Leadership
Communication
Ethics
Costing
Pricing
Risk Management
Procurement
Close out Note
105

 Part Four
Project Management Institute (PMI)

106

 Procurement Management Processes

Project Procurement Management involves
engaging in a systematic process to purchase or
acquire the needed products, services, or results
from an outside source which will perform the
work. Procure Management encompasses
contract management and control processes
necessary to administer contracts or purchase
orders. It also includes processes which assist in
administering a contract to assure the
buyer/seller relationships are properly managed.
The procurement management processes are:
107

 Plan Purchases and Acquisitions Plan

Purchases and Acquisitions process
involves ascertaining what is needed, and
when it is needed. Then how to assure
you have what you need when you need it.
(Novel concept!) This is completed as a
part of the planning process group.

108

 Plan Contracting The Plan Contracting

process involves documenting the
products, services, and results
requirements and identifies potential
sellers. Plan Contracting is commonly first
engaged in the planning process group.

109

 Request Seller Responses Request

Seller Responses process obtains
information, quotations, bids, offers, or
proposals from sellers as appropriate. This
is a part of the executing process group

110

 Select Sellers The Select Sellers

process is where the offers are reviewed,
and a chosen vendor rises to the top of the
Analytical Hierarchy Process. Commonly
negotiations are started in written form.
This is commonly a part of the executing
process group.

111

 Contract Administration - The Contract

Administration Process manages all
aspects of the contract and the
relationship between the buyer and the
seller including managing seller
performance and changes, providing a
basis for future work, and managing the
relationship with the projects buyer. This
is a part of the monitoring and controlling
process grouping.
112

 Contract Closure - The Contract Closure

Process assures completion and settling
terms of any contracts including resolving
any open items and closing each contract.

113

 Each Procurement Management process

results in a specific deliverable which is
used as the foundations for the
subsequent process. Combined the
procurement management processes
provide a best practice pattern for
managing contracts and vendor
relationships on a project.
114